Grains headed lower?

Last week we indicated that the corn and soybean rally was in jeopardy, and this week we have more evidence that indeed these markets may have topped for the pre-harvest period in the US. Soybeans formed a downside reversal last week when all was said and done, with new crop November running to a new weekly high, and then reversing and closing lower for the week. Corn is having its own problems this week, with a huge down day Tuesday after pushing up against the old highs, and forming what might be a double top in corn.

There are lots of reasons why corn and soybean prices may be coming down from now into harvest, first of all the fact that its likely both crops will set new record large crop yields again this year. Pro Ag yield models are suggesting the highest yield potential of the year as we move towards harvest, with corn now over 167 bushels an acre and soybeans at 44.2 bu/acre yield potential. While central and eastern corn belt areas are experiencing some dry weather recently, it hasn't been unduly warm recently in the corn belt (eastern or central), and that is keeping soybeans from losing much yield potential as we end the season for pod filling.

With the possibility of freeze damage dwindling each day, its likely that yield models will expand again late in the year as the crops are developing ahead of normal for both corn and soybeans, leaving crops less susceptible to frost damage in 2010 than a typical year. So its likely that yield models and crop conditions will expand again in the coming weeks as frost concerns are likely a non-issue for 2010 (especially true for corn). As we are already approaching harvest in many areas, corn is least likely to be adversely impacted by any dryness now in the corn belt (while soybeans still could have some yield impact).

We also are finding out that Canada crops are not as bad as earlier feared, with the Canadian crop estimates out this month showing crop sizes larger than most traders had anticipated (and larger than USDA estimates last month), so its likely that USDA carryout numbers will rise in September (at least for some countries). That takes some of the pressure off the US for meeting the world's production needs for wheat especially, but also for feedgrains.

Russian and former FSU crop production areas are starting to get rain in the northern and western regions, with Ukraine and Kazakhstan getting some precip as well that will help to replenish soil moisture levels and allow germination of winter wheat in areas that receive rain. That takes some of the pressure off the US and other areas to make up for the shortfall that impacted these areas in 2010.

While things are improving on the weather front, US exports have taken off recently, with record large export sales of crops as countries that import fear the loss of available supplies, as the memory of 2008's sharp price increase is still alive. They are panic buying right now, buying everything that they think they might need for supplies while they still can get them (at least, in their minds) and there has been a fair amount of hoarding by speculators as well, especially in wheat. But the recent $2 break in wheat might have the speculators ready to bail out, as after the buying ends by the panicked importers, we would slow export sales considerably in the last half of the year. That will be especially true if Russia goes back online with some of their exports - against all the prognosticators which indicated otherwise.

It will be interesting to see the Sept. USDA report on US wheat supplies, as unless another 200 mb hike in exports is evident, the US will still have adequate supplies of wheat left over (in fact, even with a 200 mb hike in exports we'll still have 750 mb left over - an adequate supply for sure). If exports are unchanged, Katie bar the door, as 950 mb carryout will not justify even $6 wheat (let alone $8 wheat). And if corn yields in the US turn out to be 170 bu/acre, the corn supplies will be more than adequate as well.

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